Inflation and the Choice of Asset Life

33 Pages Posted: 28 May 2004 Last revised: 12 Sep 2010

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Date Written: July 1978

Abstract

Given the current corporate tax structure in the U.S., inflation may have an important impact on the production decisions of firms, notably the choice of capital durability. This paper presents a model of competitive behavior in which firms may choose the durability of their capital goods. We find that in the presence of inflation, the taxation of corporate profits may influence both the choice of asset life and the market value of equity. In particular, the failure to index depreciation allowances depresses share values and biases the choice of asset life toward greater durability. Integrating this analysis with the traditional one-sector monetary growth model, we study the general equilibrium impact of inflation on such long run characteristics of the economy as output per capita and the real rate of return received by investors.

Suggested Citation

Auerbach, Alan Jeffrey and Feldstein, Martin S., Inflation and the Choice of Asset Life (July 1978). NBER Working Paper No. w0253. Available at SSRN: https://ssrn.com/abstract=260444

Alan Jeffrey Auerbach (Contact Author)

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Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased)

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Harvard University (deceased)

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